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On Monday, the U.S. Department of Energy announced it was cutting its estimate of recoverable natural gas reserves in the Marcellus shale by 66%. The Department now says that 141 trillion cubic feet of gas may be recovered from the shale, versus the 410 Tcf the agency had previously reported. This adjustment comes with the increased drilling activity, and subsequent reporting of oil and gas company well results.

One such company, Range Resources (NYSE: RRC) , is also adjusting its reserve estimates. Unlike the DOE's, however, Range's numbers are going up.

Prove itRange increased its proved reserves to 5.1 Tcfe, a 14% increase over 2010. This is especially noteworthy considering the company's April sale of its Barnett shale assets. Asset divestitures in 2011 reduced proved reserves by 904 Bcfe. But no matter! Range replaced 850% of 2011 production, adding 1,493 Bcfe of proved reserves through the drill bit. The company did not add any reserves through acquisitions in 2011, and total production totaled 202 Bcfe.

Too much gas?As the DOE announced its revised outlook on natural gas reserves, Chesapeake Energy (NYSE: CHK) announced it was cutting production in an effort to relieve some of the U.S. gas glut that, paired with low seasonal demand, is driving the price of methane back into the ground it came out of. So is it really good news that Range's numbers are increasing?

First, even though Chesapeake is the No. 2 producer of U.S. natural gas, cutting its production numbers alone won't have much of an effect on methane prices. Second, a closer look at Range's proved reserves reveals some important truths.

Right now, the ethane that Range produces in the Marcellus shale is sold in the natural gas stream and not as the lucrative natural gas liquid it actually is. In 2013, companies will begin taking ethane deliveries from Range and the gas will be sold separately. As such, ethane will be treated like an NGL, improving Range's liquids production ratio and its bottom line.

The chart below illustrates the difference ethane can make when sold separately.

Commodity

2011 Proved Reserves

2011 Proved Reserves (Ethane Separate)

Natural Gas

79%

68%

NGLs

17%

29%

Oil

4%

3%

Source: Company statement.

Marketing ethane as an NGL nearly doubles Range's NGL production. This is something long-term investors should keep in mind.

Foolish takeawayThe Department of Energy expects there is 482 Tcf of recoverable gas across all U.S. shale plays. In 2010, 23% of domestically produced gas came from a shale play, and that number will increase to 49% by 2035. Thus, while total estimates have been scaled back, there is still plenty of room for companies like Range Resources to grow.

Range's crude oil production increased by 1% as natural gas production actually decreased by 1% in 2011. This point, hedging on 75% of 2012 natural gas production volumes, and the company's plan to redirect spending to liquids-rich plays, helps relieve some of discouragement brought on by low natural gas prices.

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Natural gas finally got some good news last week. First, major producer, Chesapeake Energy (CHK) announced that it was cutting its natural gas production by 50%, taking some immediate pressure off the market. Sure, (CHK) is just one company, but others may follow suit.

Second, at the urging of my friend, Boone Pickens, Present Obama announced funding of some natural gas corridors in his State of the Union address. These are chains of natural gas stations placed every 100 miles stretching from east to west and north to south that would allow heavy trucks on transcontinental routes to refuel. This would provide the extra incentive for these 18 wheelers to convert from diesel fuel to CH4 at a nominal cost and put a major dent in our oil imports.

The news was enough to trigger a massive short covering rally in this most unloved of molecules. The spot market soared 25%, from $2.25 to $2.82 per MBTU’s, while the ETF (UNG) leapt from $5 to $6.

I am going to call the bluff of the market here and buy the United States Natural Gas Fund April, 2012 $6 puts at $0.65 or best. That way I can take advantage of the huge contango that exists between the spot and forward markets for natural gas futures contracts. To avoid actually drilling its own wells, the (UNG) buys forward contracts at huge premiums and holds them until they expire at spot. They then roll the cash forward into new contracts and repeat the process. It is one of the best wealth destruction machines I have ever seen and explains why (UNG) has, by far, outperformed natural gas on the downside. It is a great thing to be short.